Leasing vs Purchasing a Car: A Financial Breakdown

02 Feb 2024 Leasing vs Purchasing a Car: A Financial Breakdown

Key Takeaways

• Leasing a car often results in lower monthly payments but offers no ownership.
• Buying a car is typically more expensive upfront but builds long-term equity.
• The cost of leasing vs. buying a car depends on depreciation, interest, sales tax, and ownership goals.
• Leases can be ideal for those wanting new cars frequently with fewer long-term commitments.
• A personalized financial analysis is essential for choosing the best option for your situation.

When deciding whether to lease or buy a car, you’re not just choosing how you’ll drive — you’re making a significant financial decision that can affect your cash flow, long-term wealth, and lifestyle.

In this guide, we’ll walk through the financial analysis of leasing vs. purchasing a vehicle, breaking down costs, scenarios, and long-term considerations so you can make an informed decision.

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What Is the Difference Between Leasing and Buying a Car?

• Leasing is essentially a long-term rental. You pay monthly to use the vehicle for a set period (typically 24–48 months) and mileage limit. Leasing typically requires a smaller down payment compared to buying. At the end of the term, you return the car or may have the option to purchase it. Leases also come with mileage restrictions, so you may incur extra fees if you exceed the agreed limit.

 

• Buying a car means you own it once the loan (if any) is paid off. At that point, you own the vehicle outright and can customize, sell, or trade it without restrictions. You can sell it, trade it, or keep it for as long as you like. Most buyers use car loans or an auto loan to finance the purchase, and a traditional loan allows you to build equity in the vehicle over time. Buyers can choose to pay cash or use auto loans, and making a larger down payment can reduce loan payments and interest. When buying, you also have the flexibility to trade in your car when purchasing a new one, which is not typically an option with leasing. As an owner, you can drive as many miles as you want, without worrying about mileage restrictions.

Understanding the difference between leasing and buying a car helps you assess which aligns better with your financial and lifestyle goals.

Cost of Leasing vs Buying a Car: A Side-by-Side Analysis

Let’s use an example to explore a long-term cost comparison: lease vs. buy a vehicle.

When comparing these options, it’s important to consider the monthly car payment, average lease payment, and overall monthly cost, as these are key factors in determining affordability and making an informed decision. When buying a car, you pay the full purchase price of the vehicle, either upfront or through financing, while leasing only requires you to pay for the vehicle’s depreciation and associated fees over the lease term.

Purchase Cost Breakdown:
The purchase price of the car directly affects the total loan amount and your monthly loan payments. When you buy, you are responsible for the full purchase price, which may require a larger down payment and higher monthly payments compared to leasing.

Lease Cost Breakdown:
Leasing typically involves an acquisition fee, which is an upfront additional cost charged by the leasing company to initiate the lease. Your monthly lease payment includes both the depreciation of the vehicle and finance charges. At the end of the lease, the car’s residual value (the expected value of the car at the end of the lease) is used to determine your total lease cost.

Cost Comparison:
Both leasing and buying may involve additional costs such as maintenance, repairs, or penalties, which can impact the overall affordability of each option.

Vehicle Example:

• MSRP: $45,000
• Negotiated Net Price: $42,000
• Lease Term: 39 months, 7,500 miles/year
• Interest Rate / Money Factor: 6.98% (0.00291)
• Sales Tax Rate: 8.99%

 

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Lease Costs Breakdown

Depreciation

• Residual Value (79% of MSRP): $35,550
• Depreciation: $6,450 ($42,000 – $35,550)
• Monthly Depreciation: $165.38

Interest (Rent Charge)

• Interest: $225.67/month

Sales Tax

• Tax on monthly payments: $35.16/month

Total Monthly Lease Payment: $426.21
Total Over 39 Months: $16,622.19

Note: Additional end-of-lease charges may apply for excess mileage, wear and tear, or disposition fees.

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Purchase Costs Breakdown

Sales Tax

• One-time at purchase: $3,775.80

Loan Payment

• Total Loan: $45,775.80
• Loan Term: 72 months
• Monthly Payment: $780.07
• Total Paid in 39 Months: $30,422.57

Depreciation & Equity

• Vehicle Resale Value at 39 months: $35,550
• Remaining Loan Balance: $24,037.52
• Equity Returned at Sale: $11,512.48

Net Cash Outlay: $18,910.09 (after resale)

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Pros and Cons of Leasing vs Buying a Car

Leasing a Car

Pros:

• Lower monthly payments
• Always drive newer cars
• Fewer repair concerns (under warranty)
• Tax advantages for business use in some cases
• Potential for lower payments and a smaller down payment compared to buying
• Access to lease deals, tax credits, and incentives, especially for electric vehicles and plug in hybrids
• Ability to drive a new vehicle more frequently and easily upgrade to your next car
• Flexibility to lease a car for a set lease period, typically managed by a leasing company
• Ability to drive the latest electric vehicles and benefit from tax credits
• Most leases have similar terms, including mileage restrictions and end-of-lease procedures
• Leasing typically involves lower monthly payments because you only pay for the car’s depreciation during the lease period

Cons:

• No ownership or equity
• Mileage limits and wear fees
• Mileage restrictions can result in hefty fees if you exceed the allowed miles
• Risk of hefty fees for damage beyond normal wear and tear at the end of the lease
• Additional cost if you terminate the lease early (lease early)
• Need to return the leased vehicle at the end of the lease period unless you choose to buy it
• Restrictions in the lease agreement and lease contracts, including limits on modifications (except for professional window tinting)
• Risk of continuously lease and never owning the car’s title
• Long-term cost may be higher if leasing repeatedly
• Customization restrictions

Buying a Car

Pros:

• You own the car and build equity
• Once you finish your loan payments, you own the vehicle outright
• You can save money in the long run, especially if you keep the car for many years or buy used
• You have the option to pay cash and avoid loan payments altogether
• No mileage limits—you can drive as many miles as you want without additional mile penalties
• You can modify or sell the car anytime, including adding professional window tinting

Cons:

• Higher monthly payments
• Higher upfront purchase price and potential additional cost for repairs after the warranty expires
• Depreciation risk, as the vehicle’s depreciation impacts its resale value
• Car buyers need to consider the timing and market conditions for their next car purchase
• Out-of-warranty repair costs after a few years

Is Leasing a Car Ever Better Than Buying?

Yes, especially if you:

• Prefer lower monthly payments
• Like driving new vehicles every few years
• Use the car for business and can deduct lease costs
• Want to avoid long-term repair risks

Leasing may also be better when resale values are uncertain or when you don’t plan to keep a car long enough to build equity.

Leasing an electric vehicle or plug in hybrid may allow you to benefit from federal tax credits and special lease deals, which can lower your overall costs. Lease deals often make it easier to drive a new vehicle with the latest technology and features more frequently.

Why Do People Lease Cars Instead of Buying?

People lease cars for a variety of reasons:

• Affordability: Leasing lowers monthly out-of-pocket expenses.
• Flexibility: Easy to upgrade vehicles more frequently.
• Predictability: Warranties cover most repairs during lease terms.
• Business Deductions: Leasing may provide tax benefits.

Attractive lease deals, available tax credits, and special incentives for electric vehicles make leasing especially appealing to many consumers.

Conclusion: Lease or Buy – Which One Is Right for You?

In our example, leasing costs $16,622.19, while buying costs $18,910.09 over the same 39 months. However, buying leaves you with over $11,000 in equity, which can offset future vehicle purchases.

If short-term affordability is your goal, leasing may be appealing. But for long-term savings and ownership benefits, buying is likely the better financial move.

Still, every situation is unique. Factors like mileage needs, tax benefits, and investment opportunity costs can make one option more attractive than the other. Always conduct a personalized financial analysis before making your decision.

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FAQs: Leasing vs Buying a Car

1. What are the key differences between leasing and buying a car?
Leasing is like renting—you don’t own the car. Buying means full ownership, typically through a car loan.

2. Is leasing a car cheaper than buying?
Leasing usually has lower monthly payments, but buying can be more cost-effective in the long run due to equity buildup.

3. When is leasing better than buying?
Leasing is better if you want a new car often, have low mileage, or want lower upfront costs.

4. Why do people prefer leasing over buying?
Leasing offers flexibility, lower monthly costs, and fewer long-term maintenance concerns.

5. What factors should I consider before leasing or buying?
Consider total cost, mileage, tax implications, lifestyle needs, and how long you plan to keep the car.

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